In short, there is a really serious problem inherent in any banking system in which the standard is itself a medium of exchange. The very fact that gold is money means that, in any fractional reserve system based on gold, there is an inherent tendency for the system to implode when there is a loss of confidence in bank money that causes a shift in demand from bank money to gold. In principle, what would be most desirable is a system in which the monetary standard is not itself money. Alternatively, the monetary standard could be an asset whose supply may be increased without limit to meet an increase in demand, an asset like, you guessed it, Federal Reserve notes and reserves. But that very defect is precisely what makes the Ron Pauls of this world think that the gold standard is such a wonderful idea. And that is a scary — as in terrifying — thought.

4 Responses to The Defects of the Gold Standard and the Ignorance of Ron Paul

How wonderfully obtuse. The purpose of the gold standard is to prevent fractional reserve banks from creating money from thin air. The fact that it will, indeed, do that is treated as some sort of shortcoming.

You are correct in that anything that prevents the practice would do just as well.

In any event, who is buying debt? The US Government as quantitative easing and China to peg their currency. Neither represents a true demand. Sure we can keep interest rates down for some period but at some point, investors are going to demand to be compensated for the risk. Frankly, I don’t want to be holding dollars when that happens but I think we have some time yet.

After the Euro collapses, next in line is the YEN, which is just starting to sell off.

Anyway, do you have any currency positions or short gold short positions or is your analysis just hot air? It’s very easy to make economic positions, when you don’t have anything on the line.

For the record, I went short silver this past week because I happen to agree with you that there are too many greater fools chasing the metals right now. The market needs to rip them up.

It’s easy to paint inflation as bad by including the volatiles like food and energy in the mix, but economists don’t include that data because it distorts the long-term data.

Be that as it may, you appear to be conflating gold as a commodity with gold as a currency. I have no objection to gold as a commodity (any more than I have with corn, orange juice, etc. as commodities).

Sure we can keep interest rates down for some period but at some point, investors are going to demand to be compensated for the risk. Frankly, I don’t want to be holding dollars when that happens but I think we have some time yet.

That’s like saying you don’t want to be holding gold when the price collapses… I guess my reaction is… Well DUH!

Investors still regard US treasuries as a great investment in volatile times. And there will be little or no movement on the yields for the foreseeable future (in fact, one auction a few weeks ago had a negative yield) will be very low.